PSA, Renault doomed to trail VW as Sarkozy saves jobs

PARIS -- PSA/Peugeot-Citroen SA and Renault SA may fall further behind European competitors as the carmakers bow to French government pressure to protect jobs ahead of next year's presidential election.

PSA CEO Philippe Varin distanced himself from a leaked proposal to close a French plant after the government described it as "unacceptable." Renault CEO Carlos Ghosn was forced in May to pledge he would make building upscale cars for French factories a "priority" before getting government approval for a new chief operating officer.

The overt influence comes as the two lose market share in Europe and lag behind Volkswagen AG in profitability. The government, which is Renault's largest shareholder, also exerts influence at both carmakers through tax breaks, research credits and employment incentives.

"The problem is that the government takes a shorter-term view than many hedge funds," said Arndt Ellinghorst, an analyst at Credit Suisse in London. "The market's low valuation of the French car industry is clearly related to the government's impact."

Renault shares have dropped 11 percent this year, valuing the Boulogne Billancourt-based carmaker at 11.4 billion euros ($16.2 billion). Peugeot has gained 3.3 percent, giving it a market capitalization of 6.87 billion euros. VW has advanced 8.7 percent in the same period and is worth 58 billion euros.

Profit lags

Peugeot's European market share has shrunk to 13 percent through the end of May from 13.8 a year earlier, according to industry association ACEA. Renault has fallen to 9.6 percent from 10.4 percent, while VW has gained to 22.8 percent from 21.1 percent.

VW last year posted 6.85 billion euros in net income, compared with Renault's 3.42 billion euros and Peugeot's 1.13 billion euros. Peugeot and Renault trail because they depend more heavily on sales of smaller, cheaper models than VW, while facing similar hourly industrial labor costs at their domestic plants, Eurostat data show.

French plant closures have been avoided even as domestic vehicle output fell 50 percent in 15 years. In 2009, as the economic crisis deepened, the U.S. government shepherded General Motors Co. and Chrysler Group LLC into bankruptcy, then financed recovery plans in return for their undertakings to shed workers and close factories.

French President Nicolas Sarkozy did the opposite, demanding that Renault and Peugeot agree to keep all domestic plants open before drawing 6 billion euros in emergency government loans. The government pressure has only intensified as Sarkozy prepares to seek re-election in 2012.

Leaked document

"Announcing any domestic reorganization before then would be maladroit for Peugeot or Renault," said Lionel Heurtin, who helps manage 1.2 billion euros in investments including Peugeot shares for Paris-based Ofi Asset Management.

Peugeot this month confirmed the authenticity of a leaked internal plan to scrap its Aulnay plant in 2014 and lay off 3,600 workers, while maintaining no decision has been made. The factory north of Paris assembles the C3, the Citroen brand's offering in the subcompact segment.

Executives had already concluded early in 2010 that no announcement could be made until after the election, according to the document.

"There is an issue with our competitiveness in the (subcompact) segment that is currently the subject of discussions," Varin said in an interview in Brussels yesterday, declining to comment further. "Our focus is to do all we can to maintain jobs in France and make our sites as competitive as possible."

Both French carmakers declined to give details of tax breaks and other support they receive. A government spokesman also refused to comment.

Botched spy case

Renault, in which the government owns 15 percent and holds two board seats, placed overseas production of no-frills models at the heart of a plan unveiled in February to deliver 3 million vehicles and a 5 percent operating margin in 2013, compared to 2.6 million vehicles and a 2.8 percent margin in 2010.

After a botched industrial espionage investigation led to COO Patrick Pelata's April resignation, the nomination of a successor took seven weeks, as the government twice summoned Ghosn for talks on strategy.

Carlos Tavares' appointment went ahead only after Ghosn agreed to prioritize the development of upscale cars for French factories.

"Part of the reason these companies trade on a very deep discount to the rest of the sector is the inflexibility of their French production," said Michael Tyndall, an automotive analyst with Barclays Capital in London.

Peugeot shares are currently worth 5.3 times estimated 2011 earnings and Renault is valued at 6.3 times, according to Bloomberg data. That compares with multiples of 11 for VW and 23 for Fiat S.p.A.

'Heavy hand'

Fiat CEO Sergio Marchionne has plowed ahead with reforms in Italy, where he says the carmaker is unprofitable, by winning concessions from workers to raise productivity and announcing plans to close one plant in the country at year's end.

Fiat's shares are up 5.3 percent this year, valuing the Turin-based carmaker at 8.65 billion euros. Peugeot has yet to announce firm plans for successors to the C3 and Peugeot 207 subcompacts, currently assembled across four European sites including Madrid, Spain, and Trnava, Slovakia.

According to the Aulnay closure plan, Peugeot executives identified "a window for a possible announcement in the French electoral calendar, in the second half of 2012."

Closing the plant would be "unacceptable," French Industry Minister Eric Besson said after the document was leaked. Even without a direct stake in Peugeot, the government has other "means of persuasion," he added.

Said Robert Hancke, who teaches political economy at the London School of Economics: "French companies had enjoyed more autonomy from government since the economic crisis of the 1980s, but now we're seeing a return of the heavy hand of the state."